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I came from a country with high interest rates where you can easily find an investment that pays more than inflation, but I moved to New Zealand and was surprised when I saw that the inflation rate is around 1.6% quarterly and my bank pays me 4.5% yearly.

Am I missing something basic? For me it's very odd that I lose money over time when I'm saving it.

Do kiwis opt for different types of investments other than the ones offered by money? Perhaps save & lose money until having a sum to invest in something bigger, like getting a mortgage and buying a house?

Maybe my bank is just bad in investments? :)

Just a background: I don't have big sums of money, so I'm talking about the investments one makes to put what is left from salary.

Roberto
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Note: that the New Zealand CPI in 2014 Q2 is 1.6% Year on Year, that is it is the inflation rate from 2013 Q2 to 2014 Q2. The quarterly change from 2014 Q1 to 2014 Q2 is 0.3%. Check out this Inflation Calculator.

At the same time the Official Interest Rate in New Zealand was just raised on 24th July 2014 by 25 basis points to 3.5%.

So your savings in the bank at a rate of 4.5% is beating inflation, but once you deduct any tax from the interest earned, you are just beating the current inflation rate, which is not really a good long term investment choice.

Victor
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You are not missing something basic. Putting money in the bank will cost you in terms of purchasing power.

The same thing has been true in the US and other places for a long time now. The real interest rate is negative--there is too much aggregate wealth being saved compared to the number of profitable lending opportunities. That means any truly risk-free investment will not make as much money as you will lose to inflation.

If the real interest rate appears to be positive in your home country it means one of the following is happening:

  1. Capital controls or other barriers are preventing foreigners from investing in your home country, keeping the interest rate there artificially high

  2. Expected inflation is not being measured very accurately in your home country

  3. Inflation is variable and unpredictable in your home country, so investors are demanding high interest rates to compensate for inflation risk. In other words, bank accounts are not risk-free in your home country.

If you find any securities that are beating inflation, you can bet they are taking on risk. Investing in risky securities is fine, but just understand that it's not a substitute for a risk-free bank account. Part of every interest rate is compensation for the time-value-of-money and the rest is compensation for risk. At present, the global time-value-of-money is negative.

farnsy
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Do kiwis opt for different types of investments other than the ones offered by money?

Yes. By now you have probably noticed that almost all New Zealand investment capacity is directed into the housing bubble, financed by Australian and Chinese banks.

If you are not already in the housing market, it is very difficult to get in, and it is not going to get much easier. I know people who have bought tiny apartments, or houses in cheap places like Gore, then rent them out and still pay rent on where they live, just to start accumulating equity.

Rupert Morrish
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